Special Report on VAT Quick Fixes: Call-off stock simplification
Under the umbrella of its 2016 Action Plan on VAT, in October 2017 the Commission published an eagerly awaited communication document, together with a series of legislative proposals for the far-reaching reform of the EU VAT system with two key aims: to make the EU VAT system more robust against fraud, and to make it simpler for businesses trading cross-border in the Single Market. The package of measures towards what the Commission calls ‘a single EU VAT area’ includes proposals for a ‘Definitive VAT Regime’ which is intended to replace the transitional arrangements entered into in 1993. In essence, the proposals seek to treat the business-to-business (B2B) Intra-EU supply of goods as a single transaction with VAT charged by the supplier in the Member State (MS) to which the goods are moved. This framework is accompanied by certain mitigation measures and simplifications along the way including the so-called ‘Quick Fixes’ which are designed to implement a range of short term measures to reduce complexity and fraud in a number of key areas whilst the long term discussions on the Definitive VAT Regime continue.
The four Quick Fixes were agreed at the end of 2018 to take effect from 1 January 2020 and include measures concerning the following areas:
Simplification and harmonisation of VAT rules regarding call-off stock arrangements
Simplification of VAT rules in order to ensure legal certainty regarding chain transactions
Obtaining a customer’s valid VAT ID number will become a substantive requirement for zero-rating Intra-EU supplies of goods; and
Harmonisation of presumptive rules on the proof required to zero-rate an Intra-EU supply of goods
Where businesses are moving goods intra-EU, the new rules will have an impact in terms of VAT compliance processes and controls, foreign VAT registrations, VAT refunds, as well as potentially posing a number of questions around supply chain structuring and contractual terms and conditions entered into between commercial parties. Naturally, any changes will need time and careful consideration for their efficient and effective execution, thus prompt action is advisable given next year’s fast approaching deadline. It should also be noted that whilst the intention behind the Quick Fixes is to simplify, in practice the rules carry a certain amount of complexity without resolving all, or indeed many, of the VAT issues at stake.
This Bulletin elaborates on the nature of the rules from an EU VAT law perspective, as well as setting out practical considerations and questions that businesses should take into account in order to determine the potential threat or strategic opportunity that the Quick Fixes present. It should be noted that the EU Commission is currently preparing Explanatory Notes (‘Notes’) to clarify certain aspects of the rules which have now been published in draft available via this LINK. However, a critical element that remains unclear in many cases is how individual MS will implement and apply the rules in practice at a national level, and whether the Commission’s Notes will help to ensure a more consistent interpretation of the rules. To date, based on the latest information we have, draft VAT laws are yet to be published in a significant number of MS, although we expect more MS to publish their draft law shortly. Nevertheless, in spite of the ongoing uncertainty across a number of areas, certain preparatory steps can be taken by businesses now in order to speed up implementation at an operational level, and indeed it is critical to start work now - by the time further clarity arrives from MS and the Commission, the lead time for businesses to effect the new changes before the end of the year will be very short.
Call off stock simplification
Rules
Call-off stock is the term used to describe the supply of goods to a customer’s premises where legal title in the goods does not pass until the customer actually calls-off the goods as and when required. NB: This is not to be confused with consignment stock which is when the supplier holds stock in a particular territory from which to meet future (as yet unspecified) customer orders as and when required. In the absence of a simplification measure, under current EU VAT rules the movement of own goods to another MS would generally be deemed to be a transfer for VAT purposes. This would require the supplier to register in the MS of arrival in order to perform an Intra-EU despatch together with an Intra-EU acquisition, followed by a domestic supply to the customer at the time of call off. On the basis that the delayed timing of the legal title transfer potentially creates additional VAT compliance in the MS of arrival and therefore administrative cost for the supplier, many MS (but not all) already apply certain simplification arrangements that remove the need for a local VAT registration. However, these solutions are implemented at a national level and inevitably differ from one MS to the next which can make their practical use complex from an operational perspective.
In order to simplify and harmonise the approach across the EU, from 1 January 2020 where the supplier already knows the identity of the customer in advance of the transfer of stock, the initial movement of goods will be ignored for VAT purposes and instead there will be a direct Intra-EU despatch by the supplier and acquisition by the customer at the time when the customer takes the goods out of the stock (thereby removing the need for a local VAT registration for the supplier), provided that:
Call-off occurs within 12 months of arrival.● The supplier is not established in the MS of arrival (although the rules do not specifically preclude its registration there).● The customer is registered (although not necessarily established) in the MS of arrival and has provided their VAT ID to the supplier.● The supplier must keep a register of goods transferred and complete European Sales Lists (according to the Notes, with a nil value for the initial transfer, and with the actual value once the relevant goods are called off).● The customer must keep a register of goods received.● Customer substitution is possible if this occurs within a 12 month period and the relevant records are amended accordingly.● A supplier VAT registration is still required (ie, the simplification does not apply) if:○ Within 12 months, the goods are not supplied to the intended customer or substitute, or not returned to the country of despatch.○ Goods are transported to another country.○ Goods are destroyed, stolen or lost (the Notes suggest that a large majority of MS agree a small tolerance would be acceptable here - where the losses amount to less than 5% of the total stock value).
Practical considerations
MS are obliged to implement this simplification measure - ie, it is not optional. This means that:○ Those MS that do not yet have a simplification measure in place will need to implement the new rules into their national law by 31 December 2019.○ Those MS that already have a simplification measure in place will need to adapt the current rules in line with the new provisions - for better or worse. It is not yet clear what the impact might be on MS that currently apply consignment stock relief as well.● The supplier should be permitted to have a VAT registration in the MS where the call-off stock is located but the relief would not seem to apply where it has a fixed establishment there.● There can be call-off stock arrangements for different customers in the same MS as long as the relevant conditions are separately fulfilled by the different parties.● Agreement is needed between supplier and customer to put in place a call-off stock arrangement.● Accurate VAT compliance and record keeping will be essential in order to apply the relief.● The 12 month time limit applies in relation to the goods transferred and not per intended acquirer.
Questions for businesses to consider:
Do you, as a supplier or as a customer, currently use call-off stock or consignment stock arrangements, and if so in which MS? Do you understand how the current arrangements might be impacted from 1 January 2020?If you do not currently use call-off stock arrangements, do the new rules create an opportunity to put a call-off structure in place, and potentially deregister for VAT in certain MS?3. Do you know your customer before the goods are transferred and how do you document the arrangement?4. Do you, as a supplier, have a fixed establishment in the country of the call-off stock?5. Who is in charge for the transport - supplier or customer?6. Where is the stock held - ie, at the customer’s premises or at another location such as a third party warehouse?7. How long after arrival are the goods called-off, and how would you track this?8. Are goods sometimes destroyed, stolen or lost?9. Are goods transferred from the call-off stock to another MS (other than to the initial MS of despatch)?
Information on the second quick fix to follow soon...
For a deeper discussion of how these issues might affect your business, please call your usual PwC indirect tax specialist or if you prefer to speak to one of our global indirect tax policy specialists, please contact:
Tom Corbett, Dublin: +353 (1) 792 5462 tom.corbett@pwc.com
EU
